Back to top

Image: Bigstock

Time for Coffee ETF On El Nino-Driven Shortage?

Read MoreHide Full Article

Forecasts suggest an upcoming El Nino weather pattern, known for its hotter and drier conditions, could significantly affect robusta coffee bean production in major producers like Vietnam and Indonesia.

As per Fitch Solutions’ research unit BMI's report on May 24, there's an increasing concern about a drop in output as we move into the third quarter of 2023, per a CNBC article.  

Robusta beans compared to their costlier arabica versions, have also faced unfavorable weather conditions in Brazil, including droughts.

Robusta Coffee Prices to Go Up?

The price tags on instant coffee and espressos, commonly made with robusta beans, might soar as supply concerns grow and demand increases. This surge is partly due to consumers turning to cheaper variety robusta. Record-breaking heat in Southeast Asia in mid-May further amplifies these apprehensions.

In any case, Robusta beans make up 40% of the world’s coffee production, and arabica beans constitute the remaining portion. Lower output and higher demand should boost prices of Robusta. Indeed, Robusta coffee prices recently hit a 15-year high of $2,783 per ton in late May, data from the Intercontinental Exchange reveals.

Robusta Demand on the Rise in Asia and Europe

Robusta has found an increasingly strong market in Asia, which has demonstrated a preference for robusta over arabica. As such, robusta demand is outpacing that of arabica, according to Shawn Hackett, President of Hackett Financial Advisors, quoted on CNBC.

However, this affection for robusta is not limited to Asia. Europe is also gravitating towards the cheaper coffee alternative. No wonder, this will create a deficit of Robusta. The ongoing global growth slowdown and high inflation also explains the higher demand for cheaper variety of coffee.

Coffee ETFs in Focus

This potentially volatile market situation could prove lucrative for investors considering coffee ETF. These funds, designed to track the price of coffee, may see significant gains as prices rise, thus providing an excellent investment opportunity.

iPath Series B Bloomberg Coffee Subindex Total Return ETN

The underlying Bloomberg Coffee Subindex Total Return reflects the returns that are potentially available through an unleveraged investment in the futures contracts on coffee. The fund charges 45 bps in fees.

Published in